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Court decision protects IRAs from asset liquidation

New Jersey residents who find themselves in need of a fresh financial start frequently turn to Chapter 7 bankruptcy for debt relief. A recent appellate court ruling offers a measure of protection from asset liquidation to bankruptcy filers whose retirement plans included single-payment IRA annuities.

Changes to the bankruptcy laws in 2005 gave creditors more rights in Chapter 7 proceedings. The Bankruptcy Abuse and Consumer Protection Act placed restrictions on the ability of some consumers to discharge debt, but it did not eliminate protections that federal law gave to IRA and 401(k) retirement accounts. Bankruptcy trustees, whose primary function is to recover non-exempt money and property from filers to apply toward creditor claims, soon set to work to challenge the legitimacy of retirement accounts.

The case before the appeals court involved a man who purchased an IRA annuity by rolling over money from other retirement accounts. The full cost of the annuity was paid in a single payment. The trustee argued that the Internal Revenue Code section dealing with retirement account annuities did not permit a fixed-payment annuity. By disqualifying the IRA, the trustee hoped to gain access to the funds in the account on behalf of creditors, but the appeals court sided with the owner of the IRA in ruling against the trustee’s narrow interpretation of the tax law.

Chapter 7 bankruptcy offers a person the opportunity to obtain debt relief with a limited protection from asset liquidation. As trustees attempt to find ways to gain access to assets previously thought to be exempt from liquidation, a consumer contemplating bankruptcy should know the exempt asset rules prior to filing. An attorney is a good resource for the most current information about Chapter 7 bankruptcy, retirement accounts and other asset protection questions or concerns.

Source: Life Health Pro, “Bankruptcy court rules IRA annuity shielded from creditors“, Jeffrey Levine, November 20, 2013

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